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>> this is n.b.r. >> susie: good evening everyone. i'm susie gharib. the markets were closed for thanksgiving, so tonight we take a special look at an important issue for all americans: the fiscal cliff. >> tom: i'm tom hudson. massive spending cuts and tax hikes are set to hit the u.s. economy on january first. by most estimates if we go over the cliff, the u.s. economy will plunge into recession. >> susie: we look at the impact of the coming cliff and whether congress and the white house can strike a deal. >> tom: that and more tonight on n.b.r.! it was the chairman of the federal reserve ben bernanke who first called it a fiscal cliff. he described the coming automatic cuts in government spending and increases in taxes as, quote, "a massive fiscal
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cliff," end quote. here's what he was describing: on january 1, 2013, tax breaks worth $416 billion will expire. spending on things like defense, medicare payments to doctors will be slashed by $65 billion. add it all up and you are talking about cutting roughly half a trillion dollars from the federal budget. the congressional budget office and others warn going over the cliff will send the economy into a recession in the first half of next year. it was congress and the white house that set the deadline in hopes of forcing each other to cut the federal budget deficit and begin to address the growing national debt. of the half trillion dollars the fiscal cliff is designed to cut in red ink next year, 80% of it comes in the form of higher taxes. under current law, 20% comes from lowering government spending. this is just the first step as part of a $7 trillion effort to cut the debt over the next decade. that has led some to describe what could be coming as a fiscal slope, not a cliff. whatever geological description
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you prefer, it is on the map for every american. >> susie: a critical issue in this fiscal cliff debate: jobs. if the government cuts spending and raises taxes all at once on january 1, the economy will lose 2.5 million jobs. sylvia hall reports. >> reporter: in this baltimore lab, dr. curt civin researches leukemia in search of a cure. it's hardly a political job, but these days he's keeping a close eye on the federal budget. you see, the sequester-- the severe spending cuts headed our way in january-- could affect him. if it takes affect, it will cut an estimated $2.5 billion from the national institutes of health. dr. civin and researchers like him depend on grants from the institutes for funding. >> it's tough enough to cure cancer. tough battle. going to take a long time. to cut the funding, to have unevenness, to take a project all the way, and then say, "well, we can't scale this up the way we should, or even maintain it the way we should?" how can we do that.
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and it's not good for us. >> reporter: dr. civin says labs across the country may have to lay people off if their grants are defunded or reduced. eventually, that could lead to less research and fewer cures. he's especially worried about young scientists. some of them have new- potentially breakthrough- ideas, but might struggle to get financial backing when grants are harder to win. >> i have a pile of ten of those to review, and only one of those gets funded. i'm going to fund the surest thing. or recommend funding of the surest thing. that means by definition, the stuff that i'm used to. that i expect. that is an incremental gain. but this risky one, down at the bottom of the pile, well that could be great, but i'm just not sure. it's so new, it's so different, i'm not going to fund it. >> reporter: the sequester would have a similar effect on a wide range of programs across the country, from science, to public safety, to education.
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defense spending would take a huge hit with about $500 billion in cuts over the next ten years. in phoenix, mayor greg stanton calls sequestration the number one threat to his city's economy and disastrous for arizona jobs. >> in arizona, we would lose almost 50,000 jobs immediately. and we know that they're the right kind of jobs. 35,000 of those jobs would be in the defense and aerospace industries and in arizona, those are some of our highest paying jobs. >> reporter: that's the case in regions across the country where the defense industry is strong. one of those is johnstown, pennsylvania. the manufacturers that used to make steel here found new life making things for the u.s. military. but here at j.w.f. industries, defense orders are already starting to decline. they estimate the sequester could lead to a 60% profit cut and layoffs of more than 100 workers. >> we're in small town america. and it's not like we're in the beltway where if you lose this job, you can go to another job. there's another opportunity, you don't have that here.
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so anyone in the defense industry that's in small town america, is going to have a huge impact. >> reporter: so while all these cuts are one way to help washington get its fiscal house in order, c.e.o. bill polacek says it would take a massive, preventable and personal toll here in johnstown. >> everything i've worked for, everything everybody worked for, in 25 years of business that we're celebrating this year, could all be for naught, only because the people in congress, and the senate, can't vote to do what's in the best interest of the american people. >> reporter: congress has until january first to avert the sequester. until then, manufacturers, researchers, teachers and a host of others will be waiting to find out if and how the fiscal cliff will affect them. sylvia hall, "n.b.r.," washington. >> tom: we've seen the estimates on going over the cliff, recession, some even calling it debt-mageddon. but from tax rates, to entitlement spending, what are the real policy implications here? to answer that question, our washington bureau chief darren gersh recently spoke with economists from both sides of the aisle.
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dean baker and douglas holtz- eakin joined us and after a coin toss, darren started with dean asking him whether it's good policy for the president to insist tax rates should go up for high income americans. >> well, we are going to need higher tax revenue at some point. i think this is, you know, a good way to get it. i mean, this is the politics not the policy. we will need higher tax revenue. where are you going to get it from? the people who have the money. can you get it other ways? sure. but it seems to me you can get the money. when you have an opportunity to raise a good chunk of revenue by not doing something, i think i take that. you could negotiate. if they decide they want comprehensive tax reform like they did in '86, you can do that after january 1. >> is the president right to stick on this point? is it substantive or political? >> i think it's political. you need tax revenue. you want to get it with the lowest rate you can.
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that's a good rule of thumb for economic policy. even if he wants the revenue he doesn't have to raise rates as a starting point. that's politics trumping economic policy. >> one of the things that republicans have said is if they're going to bring more revenues you have to have entitlement changes. they don't say changes in social security, medicare, medicaid. is the fact that they don't name these programs shows you that entitlement reform is harder? it's one thing to talk about it but harder when you talk about specifics. >> that's absolutely true. we've seen taxes go up, down and side ways. we've never seen entitlement spending substantially change. that's a harder thing to do. that means that the spring is going to have a tough negotiation. for 20 years the republicans have said no more revenues unless you fix the entitlement programs and the democrats say the opposite. we're out of time. we have to fix the debt problem. >> you're one of the people who says don't touch the entitlement programs. first of all, is the party going to do snit. >> i think more likely than not
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they won't. let me outline the case here. if we look at the situation, very few retirees are doing very well. the prospect don't look good for those retiring in next 10, 15 years. our retirement system is broken. all you have is social security. you have tens of millions of baby boomers streaming towards retirement basically with nothing. i'm not talking about low-income people. they've never had anything in retirement. they're depending on social security. with medicare and medicaid we have our health care system as a mess. we have to fix that. if we do that, medicare and medicaid will be easily affordable. the key is to fix the health care system. >> the things that people are talking about is raising the retirement age a little bit for people who are far away from retirement and also changing the awe think about and calculate inflation. is that going to affect... do you accept that? >> no, the inflation is a cut. i mean it's a kind of game playing. i've heard people in this town saying we're going to tweak the inflation. you might tweak it. we're talking about pulling money out of people's pockets.
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>> he's made the case for entitlement reform. on social security it's disgraceful to have a system whose solvency is insured by cuts when people are in retirement. that's not a good way to run the system. we should fix it right now. most of the reforms would raise the minimum benefit and provide less generous benefits for affluent americans. that's the kind of reform we need. make the system solvent for a longer time. on health care, medicare right now has a gap $300 billion. spending going out, that is the problem. we have to take that on. >> thank you very much. havhave a good holiday. >> you too.
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susie: so how is that all of that anxiety going to play out in the markets? that's what i asked jeffrey applegate. he's chief investment officer of morgan stanley smith barney. >> you need to respect more volatility, further volatility and possibly more volatility in equity markets because the fiscal cliff issue won't get resolved any time soon. our congress is in session for only about a week-and-a-half. it's probably going to take all that time for the president and the congress to agree on a deal on the fiscal cliff which we think they will because if they don't, then you have the potential of slipping into recession which is bad for a politician. >> susie: but if there isn't a deal how are investors going to respond? do you think they're just going to stay on the side lines and wait and see? >> well, if there is not a deal then play the movie forward. you get a sharp sell-off in equity. that forces politicians to then come back to the table and to
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conclude a deal. that's not the way you want to end there. you would rather end a different way. one way or another you end up with a resolution on the fiscal cliff which means the u.s. economy does not dip into recession. we continue to grow profits, grow jobs, grow income. by extension that ought to be pretty good for equity markets. >> susie: one thing that is is worrying a lot of investors right now is there's going to be an increase in capital gains and dividends taxes so they're wondering between now and the end of the year, maybe they should take profits and some of their, you know, in their portfolio. what do you say to that? does that make sense? >> i don't think alone it does. what we generally tell people is don't let tax policy be the overwhelming decision in terms of your portfolio. obviously you set your portfolio in place because you have return and investment goals. that's really what you need to be focused in on. tax rates change all the time. but that's not the key variable. keep focusing on what your investment goals are and how you can get there.
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>> susie: i'd like to go over with you the asset allocation you've been recommending for your clients as they position their portfolios for the new year 2013. you're recommending global stocks of 38%. global bonds 38%. alternative investments 21%. and tax 3%. talk to us a little bit about the stocks. i know you're saying not only u.s. stocks but also start going into european equities. what is your thinking there? >> we're actually recommending that people have a global equity portfolio that should be exposed to u.s. stocks as well as european stocks as well as emerging market stocks. the only stock market we're not that fond of and we don't have much exposure to is japan. but the other markets we think will do well. we think it's important for u.s. investors to take advantage of the global opportunity set. if you contrast that with cash, if you're staying in cash then you're really breaking a cardinal rule of investing. you're not even protecting your purchasing power because yields
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on cash are so meager they're below inflation. we think it makes sense for people to move into more riskier classes like equities where at least you have the potential for a positive after-inflation and after-tax return. >> susie: how about the alternative investments 21% of your portfolio. what are we talking about there? >> well, alternatives... the economically sensitive asset class that we put in alternatives is commodities. commodities are also overweighed. we think economies can do well in an economy globally that's growing. keep in mind growth isn't great here in the u.s., about 2%. europe is in recession. in the emerging economies growth is 5-6%. they're very intensive as they grow. that should mean the demand for commodities will rise as we go into 2013. >> susie: jeff, this is a very complicated time to make investment decisions about this fiscal cliff looming over the markets. what's your best advice for investors right now? >> if best advice is don't get
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distracted by the fiscal cliff. don't get distracked by the tax policy debate. keep focused on what is your long-term investment goal, what kind of real return you need to generate, to achieve that goal and what asset class in the diversified portfolio will get you there. that's how people should be thinking. >> susie: thanks a lot. jeff applegate, chief investment officer. >> thank you, susie. >> tom: the fiscal cliff is an american invention politicians created hoping to force themselves to address the growing federal budget deficit. but it's something that could have ripple effects across the world. we spoke with to legendary global investor mark mobius. the world trade organization has done a hell of a good job in expanding the world trade globally. so many countries are members of the world trade organization that they expanded their exports and imports. if you have one major economy like the u.s. contracting to
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that degree, then of course it affects everyone. >> tom: is it the impact, to narrow it down a little bit, is it the impact that it has potentially on u.s. consumption? in other words, higher taxes or higher tax revenues coming from certain income levels mean u.s. consumers don't spend as much? is that the threat. >> the main threat is unemployment because despite the fact that bernanke had been pumping money through the system. >> the chairman of the federal reserve. >> if you're going over the fiscal cliff and the numbers are right minus 4% economic situation means much higher unemployment. it means less consumption. so that spreads throughout the whole society. >> tom: part of the tax debate goes right to the heart of investors. capital gains and dividends. if dividend taxes are increased, what would that mean for u.s. investors, especially those investors that are looking at the globe to invest? >> it means a lot because there
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are so many countries around the world that do not tax dividends or for that matter capital gains. >> tom: u.s. investors would get paid to go overseas. >> it's interesting to note that there is so much money sitting overseas being held by u.s. corporations that's not coming for fear that they will get this high tax. so i think they have to look at this very, very carefully because if you're able to get this money back, you're talking tens of billions of dollars coming back to america and being invested. >> tom: if there are higher taxes on dividends, if that's the result of some kind of bargain either small or grand, does it make the u.s. less attractive? >> yes, of course. yes. because there are so many investors that are looking at these companies for income. not necessarily for capital gains. so a higher tax would definitely have an impact. >> tom: what about from the company's perspective in terms of paying those dividends, what are the results? >> they would probably reduce
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and do buy-backs rather than dividends. let's look at the increase in price rather than increase in dividends. >> tom: do you think the large multinationals that are based outside the united states may see this as an opportunity to grab american investors away from their american counterprts? >> oh, yes, yes, definitely. they'll be much more attractive in that sense. >> do you see higher dividends coming from foreign companies perhaps. >> we're seeing an increase i in... increasing focus on dividends in these countries particularly in emerging countries because it's a test of corporate governance. >> tom: finally, i want to ask you about the fiscal cliff from the perspective of a mutual fund manager. are there specific concerns that you have as a fiduciary, as a mutual fund manager that there are some specific challenges ahead for the fiscal cliff and how the government may respond? >> well, you know, related to the fiscal cliff is the role of government, the size of government, and in some ways, you know, people are afraid that
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the government will cut spendi spending. in some ways that could be a good thing because the imposition of rules, regulatio regulations, et cetera, is a cost to private business. if you can reduce that cost, then you will have a surge of profitability particularly in the small- and medium-sized business community. >> finding that friction in capitalism, you're looking for that everyday worldwide. the executive chairman of the templeton emerging markets group. thank you, sir. >> thank you.
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>> tom: among the taxes scheduled to go up at the first of the year are taxes on stock dividends and capital gains. right now, both are taxed at 15%. if congress does nothing, capital gains taxes will increase to 20%. and dividends will be taxed at the ordinary income level, putting the top rate at 39.6%. high income earners also face an additional 3.8% tax on investment gains as part of health care reform. we spoke with lew hay, executive chairman and c.e.o. of utility company next-era energy. you work in an industry known for paying dividends, the utility industry. has your company considered changing its dividend policy in reaction to what the dividend tax structure may be? >> first of all dividend policy is a matter for the board. so that's ultimately their decision, but i think it would be... even though we have not taken a firm stance on that at this point, i think it would be natural over a period of time to see companies do two things if
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tax rates on dividends are very high. one is they would... may not increase their dividends as much so the pay-out ratios may come down over time, but i think the other thing you'll see is companies use more debt financing than equity financing. you know, that just adds risk back into our economy. if there was anything we learned after the meltdown of '08 is that we want well capitalized companies not highly leveraged companies. would be an incentive to go back to the highly leveraged days. >> tom: is there a case to be made about taxing income differently based upon the source of the income? >> i think so. i'm going back to what i said earlier about taxing things you don't like and lowering the taxes on the things you do like. i mean, we need more investment so i would actually either keep the rates on investments the same or even lower them. we want people to be gainfully
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employed. we want them to be productive. we want them to do better. so even tax rates on income, you know, there's a point at which it gets so high that there's a disincentive for some people not to work so much. we should be taxing the things we don't like so well. people who know me know for years i was touting a carbon tax. i thought that was dead on arrival a few years ago and would never be resurrected again but all of a sudden i'm hearing people on the left and the right saying that's not such a bad idea. we can raise some revenue and i think everybody is coming to realize that particularly with sandy that, you know, climate change is upon us. we have to start doing something about climate change and global warming. >> tom: as we're facing this fiscal cliff, this dividend cliff at the end of the year, what is your message to your shareholders, those shareholders of your stock that rely on quarterly dividend checks?
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>> i would say be patient. hang in there. i think if we have parity and combined with that tax reform and a fix to our financial situation, our deficit situation, that, you know, investors will do very, very well. but we have to fix our country's fiscal problems first and foremost. if that ultimately involves a small increase in taxes on investments but at the same time we have tax reform and, you know, we fix the budget, i think our economy will do very well and i think investors in our company but also many other companies will do quite well. >> tom: lew, thank you very much. the chairman of next-era energy. >> thank >> tom: for more research on investors and how they tend to spend dividends, but won't touch capital gains, head to our website and look for the ".n.b.r." "u" tab.
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susie: as we wrap up this nbr special our washington bureau chief darren gersh joins us for final thoughts. it's thanksgiving day, just a few more weeks until we come to that fiscal cliff deadline. what happens next? >> well, hopefully all the lawmakers are going to have extra helpings of cranberry sauce and turkey. they're going to come back next week and they're going to be ready to get to work to get down to the hard work of beginning to really negotiate out their differences. if we don't see progress by the middle of december, that's when i think it's time to get worried. >> susie: let's say that we do get a deal and there are a lot of options on the table as you've been reporting. >> sure. usie: which fiscal deal do we want? >> well, here's what i think the vast majority of people who have looked at this closely, economists, would hope would happen. that we would have as little kind of cutting of spending and ease the tax increases in the
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coming year to give the economy room to keep going forward, keep creating jobs. and then we would have entitlement cuts and tax increases that would play out over the next decade that would show the world we're seriously about getting our deficit under control. that would really help boost confidence, is the thinking. >> susie: we've been also hearing about the other side of the equation. what if we don't get a deal and this threat about going over the fiscal cliff. is there anybody who seriously wants us to go over the cliff? >> you know, there are some people who say going over the cliff would not be the worst thing to happen. they tend to be democrats. and the argument that they make is that we'd go back to the tax code that we had in the clinton years. and then probably republicans would find that so intoble that they would negotiate a better deal with democrats. it's a minority opinion. i don't think the president would really want to go over the cliff. however, it is an option that some people are contemplating. i think we can't dismiss that
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out of hand. >> susie: we have a few seconds left, darren. when we do have a deal, let's say we have a deal, we're all in this together. i mean it's not like any american is going to escape difficult times here. >> not at all. susie: we all share the pain, right? >> we're in for a decade of paying for things. we're going to have the baby boomers retiring. that will be expensive. we know that taxes, revenues, rates, whatever you want to call them are going up. we're going to have to reduce spending. we're in for a time of belt tightening and getting our deficit under control. it's going to last for years. >> susie: let's hope it won't be too bad, darren. thanks a lot. our washington bureau chief, darren gersh. >> tom: of course you can watch our continuing fiscal cliff coverage on the web online just click on fiscal cliff link on the home page right there at nbr. com. that's "nightly business report" for thanksgiving, thursday, november 22nd. good night, susie, and everyone. >> susie: goodnight, tom. thanks for watching, everyone. we wish all of you a happy
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thanksgiving. and we hope to see you online at and back here tomorrow night. captioning sponsored by wpbt captioned by media access group at wgbh
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Nightly Business Report
PBS November 22, 2012 6:30pm-7:00pm PST

News/Business. (2012) New. (CC) (Stereo)

TOPIC FREQUENCY U.s. 14, Washington 5, Darren 3, Darren Gersh 3, Us 3, Johnstown 2, Arizona 2, Dr. Civin 2, America 2, United States 1, Tom 1, Cliff 1, The Utility Industry 1, Baker 1, C.e.o. Bill Polacek 1, Sylvia Hall 1, Media Access Group 1, Wgbh 1, Lew 1, Unevenness 1
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